What Does Special Features Mean?
Special features are the details in an insurance contract that make it different from any other legally binding contract. When these special features are violated, the insurance policy can be voided.
All insurance policies are legally binding contracts, meaning they must follow all five of the requirements of legally binding and enforceable contracts:
- Agreement: An offer was made and accepted with no further negotiations required.
- Genuine intentions: All parties entered into the contract freely without fraud, duress, concealment or mistake and are aware of all the terms.
- Consideration: All parties bring something of value to the contract. In the case of insurance, an insurance company offers a promise to pay losses in exchange for a monthly or annual premium paid by the insured.
- Legality of object: The purpose of the contract must be legal and not contrary to the public good.
- Legal capacity: All parties entering into the contract must have the ability to understand the obligations being undertaken.
In addition to all five of those legal requirements, insurance contracts must also adhere to some additional special elements for them to be legally enforceable.
Insuranceopedia Explains Special Features
A number of special features make insurance contracts unique. Examples of them include:
1. An insurance contract is written by the seller (insurance company) only. Most contracts are drawn by all the parties involved. That said, insureds can also request certain coverages or, where the risk and premiums are large enough, even negotiate custom insurance policies with underwriters. These custom policy wordings are called manuscript policies.
2. An insurance contract operates on the principle of utmost good faith. In other words, there is a tacit agreement between the seller and the buyer that all necessary information must be exchanged. To violate this principle means possibly voiding the contract. In practical terms, it means any information in the application or submission to the underwriter collected from the insured must be 100% accurate. This information is used by the underwriters to determine eligibility for insurance and calculate the premium, so it is critical that the information is complete and accurate.
3. The obligation of the seller is conditional and is only triggered if and when the insured loss happens. If the insured loss never occurs, the buyer does not get anything.
4. Indemnity is related to the previous feature. The indemnity clause in an insurance contract determines the amount of the insured’s entitlement and how it is calculated when a loss occurs. An insurance policy’s indemnity is equal to the actual amount of loss sustained, factoring in loss of use, business interruption, etc. The point is, an insured is not supposed to profit from a loss, but the insurance policy is supposed to return the buyer to the same financial position they would have been in had a loss not occurred.
5. Only those with insurable interest in the object or event being insured are entitled to benefit from the policy. This means that if one would not be financially harmed by the loss of the insured object, they would not be able to purchase insurance on it. For example, a person would not be able to purchase an insurance policy on their neighbor’s house and receive a payout if it burned down because the person with the policy has no financial connection to the house. On the other hand, a mortgage lender could take an insurance policy out (or benefit from an owner’s policy by being added as an additional insured) because they have a financial interest in the home.